After a string of mortgage hikes throughout 2023 and no sign of reprieve in 2024, many homeowners are struggling to make ends meet.
Around 50% of all mortgage-holders have fixed rate periods expiring in 2024. For some, a jump in the interest rate will be a financial shock. Moreso for those who fixed two years ago in January 2022 when one-year fixed rates averaged 4.18%, and two-year rates 4.75%.
Borrowers who fixed in January 2023 paid 6.86% on average on a one-year fix, and 7.08% on two-year fixes. Mortgage interest rates continued to rise as the year progressed.
There are many ways to save money on mortgage repayments, ranging from standard refinancing to creative ways to reallocate spending or bonuses into mortgage repayments.
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1. Refinance
Homeowners often take the easy route of refixing their mortgage with the same bank rather than shopping around when a fixed rate portion matures. Mortgage adviser Gareth Veale, of EasyStreet mortgages, is astounded at the number of clients who do not remortgage with another bank to save money when they have the opportunity, although mortgage pain has brought some to the party.
The “cash contribution” on a refinance, where the bank gives new customers a lump sum of cash back once they’ve drawn down the mortgage, was popular in 2023 and shows no sign of going away. Banks use it to compete for new customers. On a $500,000 loan, a cash contribution might be $3000, said Veale. Borrowers often need to pay legal fees for the refinance, but that is less than the cash contribution. A remortgage will usually slice 10 or 20 basis points off the interest rate, he said.
2. Haggle
Haggling for a better rate with the existing bank when it’s time to refix is faster than refinancing. Haggling may bring the mortgage interest rate down, but it doesn’t come with a cash contribution, Veale pointed out. It does have the advantage of reducing mortgage repayments instantly, without the delay, cost, and hassle of going through a full remortgage with another bank.
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Homeowners can haggle with the bank themselves, but usually the best haggler is a mortgage adviser, said Veale. They know the market, know how low the banks will go, and which borrowers are seen as more desirable by the bank and therefore worth haggling with. “The higher your loan value, the more chance you have with the bank providing you a better interest rate,” said Veale.
3. Overpay
If any spare cash can be found, then overpaying the mortgage by a sum such as $100 or $200 a month, is better than doing nothing, said Veale. Extra payments come off the principal, which in turn lowers the interest paid over a year. When mortgage rates drop eventually, another good way to reduce the principal is to keep the repayments the same. The difference is credited to the principal, which reduces.
Other ways to overpay include rounding up payments to the next round figure, or dividing the existing monthly repayment in half and paying that figure every fortnight. There are 26 fortnights in a year, which is equal to 13 monthly payments.
EasyStreet mortgage adviser Gareth Veale: “The higher your loan value, the more chance you have with the bank providing you a better interest rate.” Photo / Supplied
Always check with the lender that extra payments aren’t penalised. A revolving credit mortgage can work well for homeowners who have separate savings, said Veale. “It can make sense if you are holding savings to put them in a revolving credit and keep the savings within the loan. You might get 6% on a term deposit at the moment, but after tax it’s really only 4%, but you’re paying 7% over here on your mortgage. It’s way better to save that money against the mortgage.”
4. Extend the loan term
By extending the mortgage term, the repayments are lowered, because the loan is being repaid over a longer period of time. The most common extension is from 25 to 30 years, Veale said.
Mortgage advisers tend to counsel against extending the loan if possible. Although lengthening the term lowers the fortnightly or monthly payments, a longer term results in a larger amount of interest paid over the life of the loan, said Veale.
“I’m okay with extending the term provided they don’t get lots of short-term debt. It’s the people that don’t give up the lifestyle, plus also want the toys and they get extra debt and really really hurt themselves.” Mortgage rates are most likely as high as they’re going to get, said Veale, so homeowners who can hold on should see their repayments reduce later in the year.
5. Switch to interest only
In recent years it has been difficult for homeowners to secure interest-only loans. That eased up in 2023, said Veale. Paying only interest and not principal, reduces monthly repayments. “Interest only [works] in the short-term for some people, because you’re keeping your house and meeting your obligation and not getting behind.”
Banks may be able to offer existing customers a better deal on their interest rates. Photo / Alex Burton
But it adds to the total cost over the life of the loan. It’s not easy to convince banks to allow borrowers to move over to interest only. “You have to have a legitimate reason,” said Veale. “It can't just be to keep your payments down low.”
6. The last resorts
There are other ways to make ends meet in the event of a short-term crisis. That can include taking budgeting advice to reallocate spending in order to find ways to make payments. Getting a pay rise can help.
If necessary, rent out spare rooms. It may not be ideal, but thousands of New Zealand families open up spare rooms to students, flatmates, or Airbnb guests. If it’s a short-term thing, it’s possible for the children to bunk up to free up rooms.
Some owners choose to downsize, especially after a change in life’s direction. Few people want to descend the property ladder. A lower priced home, however, and smaller mortgage consequently can ease financial crises.
Before doing anything, Veale recommended analysing bank statements line by line to look for savings, “to see if it’s a real problem or an artificial problem”.
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